Stay safe, Stay healthy & Keep at it

Crash

Rewind 3 months and I was giddy as an investor. I would wake up richer every morning without having done anything meaningful to result in that outcome. 

It felt mildly uncomfortable. It did not add up. But, I brushed it aside and got back to thinking about my next killer investment, back to "supposedly" crushing it, back to thinking about buying a house...

Then came the crash. 

First I started to hear about the few Covid 19 cases close to home. Like most (I am guessing), I brushed it aside. Then my employer asked us to work from home, which seemed like a huge inconvenience (in hindsight it's turning out to be a great decision..touch wood). 

Rapidly all hell broke loose: everyone in the family was working/schooling from home, people were starting to stockpile essentials, recreational spots like gyms closed and the stock market started to crash.

Figure: S&P 500 drop into March 2020. Source: Google finance.

Panic

Those that know me well, know how invested I am in the stock market, both financially and psychologically. I have attempted a startup around this in the past. It's now a serious hobby. 

The crash started to hit me hard and I felt that familiar rush of panic...What if I lose it all ? All those years of hard work, deep research, difficult decisions, joyful ups and painful downs...wasted. And this in the middle of the chaos and the fear at the back of the mind...Are we going to survive this virus ? 

There was a strong urge to sell out of my rapidly falling positions.

Plan

Unfortunately, I have seen a  few crashes in my career: I caught the tail end of the dot com bubble, saw the effects of 9/11 and started to invest right after the financial crisis of 2007-2008. 

Fortunately, I have learnt (a little) from these painful experiences and (a lot more) from reading about human behavior and it's role in investing.  Over the years, I have formed certain rules that I try and abide by: a primary one being "When you don't know what to do...do nothing". 

So I did not sell. Instead I did what I do best in these situations...seek solace by compulsively consuming whatever information, opinions, advice were available (and trust me there are tonnes of those especially in a spectacular crash like this one). 

One piece of advice stood out: "Form a plan". So I got to work forming one and this is what it looked like for me (your plan was/is probably different and that doesn't matter. What matters is having a plan specific to your situation):

1. Protect yourself from the risk of ruin: This was inspired by a piece I read by Ray Dalio, where the first thing to do is assess and act to ensure that you are not going to be financially ruined. For me, this meant having a cash cushion, which I determined to be 30% of my investments. I frantically pulled out my investment spreadsheet to see what my current status was: I had about 25% cash already. Not bad. That led me to the next part of the plan.
2. Sell some positions likely to underperform in the future: I sold a little bit including my positions in T and BAC. T had been an underperforming position for me for a while and I did not think with interest rates being this low, banks will generally do well in the near future. Having said that, I held on to my JPM position as they are simply an excellently run business with an amazing leader.
3. Opportunistically buy into big future winners: I have been in the process of doing this already and the idea is similar to transitioning one's business from primarily relying on an existing successful line (like the iPhone) to future lines of business (services, wearables) to keep growing. I was confident and still am that events like these present unprecedented opportunities. I have been slowly executing on this piece and go into it in more detail later.

Revise

Only time will tell if I made the right moves by executing on my plan above. What I know for sure is doing so provided me with a sense of control which is now enabling me to navigate the turbulence better.

Which brings me to my latest learning: In unprecedented markets like the one we are in right now, one's plan can't be static. It's got to be dynamic, adapt to the constant changes. For example:

• I wasn't expecting the swiftness and scale of the monetary and fiscal response(per Reuters).
• I wasn't expecting the US to become the country with the most Covid 19 cases(per Johns Hopkins)
• I wan't expecting the staggering unemployment numbers of 16.9 million people(per Marketplace).

I am still working out what the above mean for the markets going forward and how should my plan evolve but here's an early sense I am forming:

1. Getting ahead: The rapid recent rally is getting somewhat ahead of itself especially since there is no clear idea of how we emerge from this and what the economic recovery looks like.
2. More volatility: With all the unknowns there will be more volatility resulting in opportunities to buy future great companies at what could be attractive prices.
3. Exercise patience: Be prepared and more importantly be patient to execute on #2 above. 

Future

There is a fascinating concept in technology, known as Amara's/Gates' law (per Farnam Steet), that goes "we tend to overestimate what can happen in the short term and underestimate what can happen in the long term".

I believe this concept provides a way to think about what happens to the markets from here on out: In the short term there will be significant bullishness around trends defined by the Covid 19 crisis like streaming, remote work, home fitness, healthcare, diy, online learning, etc (and the associated companies). This bullishness will be short lasting as the economic ramifications are felt. But, and this is a BIG BUT, some of these companies associated with these trends will become HUGE in the long run. How huge ? Now that's the trillion dollar question isn't it ?

Stay safe, healthy and tuned for my next blog post where I talk about my list of some of those companies....


• The contents of this blog are the personal opinions and investment choices of the writer. Please don't treat them as investment recommendations.
•  I have a long position in JPM, AAPL and other companies associated with the trends I mention above like, but not limited to NFLX, ROKU,  MSFT, PTON.